Why There Is No Need To Worry About Chinese Home Buyers

When house prices rise and people can’t afford the new price level, someone must be blamed.

It is too easy to blame Chinese for higher house prices in Auckland because they are an easy target for Kiwis with anti-foreign bias.

It’s a short-sighted attitude – in most cases, foreign real estate transactions are a transfer of wealth to the recipient country.

If you don’t agree, I’d suggest you investigate how Japanese real estate purchases in the United States at the height of their 1980’s boom worked out in the long run.

Have you done that? Well, if you had, you’d know that pretty much every office building sold to Japanese buyers at “inflated prices” was bought back by a US investor at a substantial discount to what the Japanese buyer paid.

When we think about why Auckland house prices are high, we can use a simple supply and demand story.

The supply of Auckland housing is restricted by the metropolitan urban limit and a plethora of Auckland Council regulations and planning rules.

The supply of Auckland housing is restricted further by a lack of willingness on the part of banks to lend to property developers.

These two supply-side factors mean that fewer houses are built in Auckland and there is upwards pressure on house prices because supply can’t respond fast enough to what is happening on the demand side.

What is happening on the demand side? Well, Auckland is the place to be for higher wages. There is massive internal migration to Auckland from other parts of New Zealand.

This puts a lot of pressure on Auckland housing demand – before we add in that immigrants tend to move to Auckland first and stay in Auckland because that’s where the jobs are.

That means that there is a lot of demand side pressure on house prices – before we even take into account the effect of “speculative” or “investment property” demand for housing.

If we add in those demand side factors, it is quite straightforward to accept a 16% year on year rise in Auckland house prices, before even taking foreign buyers into account.

This means that blaming the Chinese, whether natural born Kiwis or immigrants, is really stupid.

As soon as supply side restrictions are eased, there will be downward pressure on house prices. The marginal “speculative” or “investment property” purchase could end up in a mortgagee sale.

There is no need to worry about Chinese home buyers, because they are a small part of the market, and if their “speculative”  buys don’t work out, the previous owner got a gift of wealth from China.